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Monday, December 16, 2013

SPX Update: Is Santa Coming to the Market Soon?

(Note: I have no clue why the paragraph spacing came out so strangely on this particular article, but I can't seem to fix it...)

Friday's action remained within a tight range, which
added little information to that day's pre-open update. Interestingly, on
Sunday, E-mini S&P futures (ES) had a wild night and thrust down into the
cash target zone, before recovering in a parabolic fashion, as the futures
market was struck with a sudden buying panic. Since futures reached the
target zone, this adds some flavor to the option discussed on Friday that the
cash market could have completed wave C of (4) down at 1772 -- though I'm still
not entirely sold on that idea.

My standing target for this wave has been 1760-1770,
and I recently added a "perfect world" target (calculated using
Fibonacci wave extensions) of 1765.33. Though I'd still like to see that
zone reached, 1772 is acceptably within the margin of error for that
target. We're simply going to have to see how things play in the cash
market to start off the week, in order to add or subtract confidence to either
view.

It's also worth mentioning that the 50 day moving
average on the S&P 500 (SPX) currently crosses 1761.74, so one more thrust
lower in cash would likely make prices a bit more attractive and pull in some
additional buyers. Essentially, we're still picking nits here on time
frames. Near-term, I'd prefer to see another thrust lower into the target
zone, though it isn't required. Intermediate-term, I'd like to see a run to the
upside target of 1825-40.

The bottom line is: Assuming this wave doesn't
mutate into the more bearish alternate count, then we'd expect the fourth wave will
find a bottom soon, most likely during the first half of this week.

An interesting seasonal statistic which should
provide bulls some encouragement: December is a positive month for
equities 73% of the time -- and during bull market years (such as 2013), that
figure jumps to 80%. Since we opened December north of 1800, and the
target for wave (5) is 1825-1840, this appears to have all the necessary
ingredients for the 80% odds to work. The fourth wave has made a nice
shake-up to clear out some of the weak hands and get folks looking
downwards. This was necessary, because it seemed we opened the month with
a lot of folks looking up. This is now the perfect setup for not only a
Santa rally, but for the "whipsaw market" I discussed on December 9:

If all preferred wave counts play out
across all wave degrees (to be fair, that's basically asking for perfection
from my work, which is something I'm rarely capable of), then we'd see another
wave down over the near term, followed by a recovery and final rally into the
wave v target zone, followed by an abrupt peak and decline. Purely from a
market psychology standpoint, a move like that would really create the feeling
of a whipsaw market, along with mass confusion.

None of the arguments presented Friday have changed,
nor have the charts. RSI still gives the odds-on favor to a new low
(near-term) with a positive divergence. This has nothing to do with wave
counts, it's purely based on historical performance.

The 30-minute chart is unchanged, and Friday was
mainly noise (note: this is not to be confused with "manly noise,"
which is the grunting sound Tim Allen made famous):

The 3-minute chart is also essentially
unchanged. At first glance, one might suspect a triangle here -- but upon
closer inspection, the structure violates Elliott Wave rules for a triangle,
since the last wave (which would be labeled "wave e" at 1779.43)
exceeded the price high of the wave which would be labeled "wave c"
(1779.27). Friday's action left the preferred near-term path open, since
1772.28 held both of the session's declines.

In conclusion, there's been no material change since
Friday. This is perhaps an overly-bold call, but I'd still like to see a
near-term rally to the above-noted targets (on the 3-minute chart), followed by
a near-term decline to 1760-70, followed by an intermediate rally to the
1825-1840 target zone (the decline and beginning of an intermediate rally would
be a nice setup for "Turnaround Tuesday").

The near-term alternate count is that wave C
bottomed at 1772, while the intermediate alternate count is that a more bearish
leg is underway. To this point, the market hasn't done anything
unexpected to cause us to favor an alternate view -- but the market always
reserves the right to do so at a moment's notice. As the next few
sessions unfold, the charts should provide us with some new patterns and key
levels, which I'll update as needed. Trade safe.

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